(STAR) By Des Ferriols - Banks expect the Bangko Sentral ng Pilipinas (BSP) to cut its policy rates by at least 25 basis points tomorrow but there is uncertainty on how monetary officials will adjust the special deposit account (SDA).

According to Frederic Neumann, HSBC Asia-Pacific economist, the BSP has taken an unorthodox tact on monetary policy setting when it reintroduced and later removed the tiers on bank placements.

“The BSP has been criticized for that but it has actually done a tremendous job fine-tuning that path,” Neumann said. “So far it has been effective and it was actually quite a smart tactic.”

However, Neumann said the BSP has had to deal with the inflationary impact of the strong peso, given that it had a limited capacity to intervene indefinitely in the market.

“Unlike China, for example, where there are capital controls, the BSP has to consider that when it buys up dollars, it effectively releases pesos into the system which it then has to mop up,” Neumann said.

Neumann expects at least a 25-basis point cut in the BSP’s policy rates.

“This move is made easier by the 50-point cut in US rates,” Neumann said. “The big question is what will happen to the SDAs. One thing we are sure of is that the BSP will not scrap it.”

According to Neumann, the real issue that the BSP would be grappling with is how costly it is for the central bank to maintain its mopping up operations.

“The central bank definitely can not release all that liquidity that is now locked up in the SDAs so they will not scrap that,” Neumann said. “So what they can do is to maybe lower the interest rates to make it cheaper for the BSP to hold on to all that parked money.”

Neumann said it might even be possible for the BSP to consider another 25-point cut at its next meeting in November.

“Inflationary risks are very real here,” Neumann commented. “For one, we are seeing a base effect because inflation was elevated last year so the low inflation rate this year is also a bit of an illusion.”

According to Neumann, it would not be easy to find the balance especially since the economy has a very limited capacity to absorb excess liquidity.

Neumann pointed out that economic growth had been fueled by remittances from overseas Filipinos which spurred domestic consumption.

“This means that the growth we have been seeing would not be sustainable over the long term because these are funds that are not being put to productive use,” he said.

BSP governor Amando M. Tetangco Jr. has already hinted earlier that the decision of the US Federal Reserve Board gave the BSP the flexibility to ease its own policy settings.

“The cut presages the orderly portfolio adjustment and that will include fund inflows into emerging markets,” said Tetangco.

Tetangco explained that while financial markets were gradually stabilizing, monetary officials would be able to focus on domestic factors that impact on inflationary expectations.

In the domestic front, however, these critical factors that used to pose risks to inflation have largely subsided, particularly the rapid growth in domestic liquidity which has since slowed down to 14.9 percent in August.

Strong peso threatens BPO investments DEMAND AND SUPPLY By Boo Chanco Wednesday, October 3, 2007

I was having lunch last week with an old friend from pre-martial law ABS-CBN days who has made it big in the world of business. He was once upon a time a news reporter but martial law made him shift his career to business.

Anyway, this friend who treasures his anonymity, mentioned that he just closed his medical transcription business. It was not his main business so he was not sulking or even complaining. He just mentioned in a matter of fact manner that the business was no longer viable. It is a mixture of things, he said, the strong peso combining with cutthroat competition with India and other countries made him throw in the towel.

He rattled off some figures as we went through our appetizers. He got into the business, he said, on the basis of his feasibility study some years ago when revenues were at $0.12/line and the exchange rate was at P56 to $1. His sensitivity analysis showed that even if revenues plunge to $0.08 (at P56), it was still a good business.

He said he started operations at $0.10/line and did OK. But revenues crashed to $0.04/line due to competition from China and India. “If FX rate stayed at P56, we would have barely broken-even. At less than P50 to $1 exchange rate, we have no chance in hell!”

We got to talk about the medical transcription business because of a press release from Citem, an agency under the Department of Trade, painting a rosy picture for the medical transcription business. According to Citem, revenues from the outsourced medical transcription service sector will grow by 90 percent yearly in the next five years from $75 million in 2006. It would outpace growth in the high-profile contact center industry, Citem predicts.

Then, there is this other story that day about the American Express Bank predicting the Philippine peso will appreciate to 42 against the US dollar in the next three months before slipping back to the 44-level in the next 12 months. That’s not all. French banking giant BNP Paribas expects the local currency to firm up at 43 to the dollar by yearend, zoom to 37 next year and further to 30 — at par with the Thai baht — by end-2009.

My friend believes in letting the market determine the exchange rate and is not advocating a special rate for exporters or massive BSP intervention to keep the peso from strengthening further. But he is just saying that those sectors of the economy who are bringing in forex earnings like OFWs and BPO operations are taking it in the chin.

He is also not saying it will be curtains for the medical transcription business but it would not be as easy to make money on it. He thinks the business might still be viable as a cottage industry with a trained transcription person doing the work at home, cutting on expensive overhead like rental for office space. But he thinks it isn’t a business that is as lucrative as government says it is.

The other threat to the business, he points out, is an improved software that allows doctors to dictate directly and it gets transcribed automatically. “This technology has been around for a while, but was not reliable. But recently, one of our clients, a major US hospital, did a pilot on the new improved software and was pleased enough with the results that they decided to shift to it and use human transcription only for very difficult cases and for editing. I was told that the software is still expensive, but as more hospitals and HMOs buy it, price should come down.”

This brings us to the other big problem of the business: lack of qualified manpower. The Makati Business Club just sent out a news alert that quotes MxSecure Inc., a US-based medical transcription services firm, saying that “the mediocre accuracy and productivity of local transcriptionists” is why the business is unable to sustain its growth. It is critical, MxSecure says, that our local transcription industry takes steps to improve Filipino transcriptionists’ English skills and productivity.

MxSecure outsources to the Philippines around 82 percent of its six million lines of medical-transcription documents per month. It revealed that in terms of accuracy, a Filipino transcriptionist averages only about 90 percent to 92 percent, way below the 98 percent minimum standard.

In India, MxSecure observes, an entry-level transcriptionist produces about 1,500 lines per day. In the Philippines, transcriptionists yield an average of only 300 to 400 lines a day. In terms of turnaround time or completion, it sometimes takes up to 72 hours in the Philippines. MxSecure normally promises its customers a 24-hour turnaround time.

It just so happened I also had breakfast with another college friend who is in the call center business. He is New York-based but comes to Manila often. He sees problems for the call center business too for the same reasons my other friend gave up on the medical transcription business.

“Two years ago,” this NY-based friend explained, “local call centers were selling seats for about $1,800 to $2,500 at an exchange rate of 54 to $1.

Now, seats are being sold for $1,500 to $2,200 and the peso is at 45. South American countries, Pakistan and African countries are fighting for the same market niches.”

He continued to explain the problems faced by the local call center operators. “The local outsourcers are challenged by the appreciating peso and increased competition. Their biggest customers (Telus, Dell) have decided to open up their own shops in Manila or buy out their former outsource provider (Ambergris is now Telus- second biggest cell provider in Canada). Dell has opened up their 8,000 seat center at Mall of Asia.”

The other problem they face is the rising real estate lease prices. Commercial real estate lease rates have gone up by 30 percent in Metro Manila.

Rising lease rates was confirmed by a real estate consultancy in a recent press conference where it was revealed that a gap between demand and supply of six to nine months. Investors, especially those looking for 10,000 square meters of space, must suffer that time lag.

According to CB Richard Ellis, leased space in Metro Manila has become so scarce that only a percentage of office space in the Makati CBD, for example, is available, and that scarcity has pushed prices up to P950 per square meter in the third quarter from P890 in the second quarter. These figures only reflect the average cost where rent could go as high as P1,300 per square meter.

So, my NY-based friend explained to me, “the inefficient outsourcers will retrench and many will close shop or be bought out by their big clients. Many call centers have moved to the provinces serviced by PLDT namely: Cebu, Davao, Cagayan de Oro, Iloilo which have zero-mile cost for their private lines to the US. More outsourcers’ clients will simply open their own shops in Manila after they get comfortable with the quality of the output of their Philippine outsourcer.”

If it is any indication of things to come, my NY-based friend said “early this year, several big outsourcers have been selling their dollars forward. Some big banks are buying the call center revenue for November and December at P43.50 to P44.00. My guess is that if the exchange rate hit 40 to $1, the call center growth will end. Meanwhile, we must ratchet up the value chain (tech support, financial services instead of 411 or Domino Pizza order servicing) to just survive.”

The beginning of life

In a round-table discussion group the question was asked of the ministerial panel, at what point does life begin.

The Catholic priest spoke first and said “At conception, of course!”

The Presbyterian minister said “No, no, it certainly begins at birth.”

The United minister tried to buffer the obvious argument point and suggested “Perhaps you’re both wrong, and it’s a compromise in that the fetus is not functional with a heartbeat until the third month”.

They had to prod the Jewish rabbi for his answer, and he finally leaned forward to his mike and spoke softly “All of my friends here are wrong. Life begins when the last child leaves home and the dog they left behind dies!”

Chief News Editor: Sol Jose Vanzi

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